# 11.3 Regulating natural monopolies

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By the end of this section, you will be able to:

• Evaluate the appropriate competition policy for a natural monopoly
• Interpret a graph of regulatory choices
• Contrast cost-plus and price cap regulation

Most true monopolies today in the U.S. are regulated, natural monopolies. A natural monopoly poses a difficult challenge for competition policy, because the structure of costs and demand seems to make competition unlikely or costly. A natural monopoly    arises when average costs are declining over the range of production that satisfies market demand. This typically happens when fixed costs are large relative to variable costs. As a result, one firm is able to supply the total quantity demanded in the market at lower cost than two or more firms—so splitting up the natural monopoly would raise the average cost of production and force customers to pay more.

Public utilities, the companies that have traditionally provided water and electrical service across much of the United States, are leading examples of natural monopoly. It would make little sense to argue that a local water company should be broken up into several competing companies, each with its own separate set of pipes and water supplies. Installing four or five identical sets of pipes under a city, one for each water company, so that each household could choose its own water provider, would be terribly costly. The same argument applies to the idea of having many competing companies for delivering electricity to homes, each with its own set of wires. Before the advent of wireless phones, the argument also applied to the idea of many different phone companies, each with its own set of phone wires running through the neighborhood.

## The choices in regulating a natural monopoly

So what then is the appropriate competition policy for a natural monopoly? [link] illustrates the case of natural monopoly, with a market demand curve that cuts through the downward-sloping portion of the average cost curve . Points A, B, C, and F illustrate four of the main choices for regulation. [link] outlines the regulatory choices for dealing with a natural monopoly.

Regulatory choices in dealing with natural monopoly
Quantity Price Total Revenue * Marginal Revenue Total Cost Marginal Cost Average Cost
1 14.7 14.7 - 11.0 - 11.00
2 12.4 24.7 10.0 19.5 8.5 9.75
3 10.6 31.7 7.0 25.5 6.0 8.50
4 9.3 37.2 5.5 31.0 5.5 7.75
5 8.0 40.0 2.8 35.0 4.0 7.00
6 6.5 39.0 –1.0 39.0 4.0 6.50
7 5.0 35.0 –4.0 42.0 3.0 6.00
8 3.5 28.0 –7.0 45.5 3.5 5.70
9 2.0 18.0 –10.0 49.5 4.0 5.5

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Imeobong
An international organization is an organization with an international membership, scope, or presence.
Avishek
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Imeobong
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if a firm stays on the same isoquant it means ? a. output missteps decrease b. output must stay. the same c. output must increase d. quantity of labour and capital employed must remain the same e. none
A
Were
A
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Bertilla
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What are diminishing marginal returns as they relate to costs?
michael
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Bertilla
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michael
the law of diminishing state that as more and more variable factor is added to a fixed cost, it will increase first and later its begins to fall until its get to zero. that were ur mc equal to zero
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Bertilla
The law of diminishing demand states that, if the price of a product is raised, a smaller quantity will be demanded and if the price of a product is lowered, a greater quantity will be demanded.
Were
The law of diminishing returns, also referred to as the law of diminishing marginal returns, states that in a production process, as one input variable is increased, there will be a point at which the marginal per unit output will start to decrease, ceteris puribus
Were
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It's also the usage of mathematical tools to express and analyse economic problems.
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Rasaq
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Economics assit in understanding the pre-requisite for Growth and developmen and how the workings of the economy operates.
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Economic helps us to manager our limited resources, how to expand it, etc over unlimited want
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Economics is the social Science in which we study how scarce resources are allocated for the betterment of human being.
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Equilibrium point is the point at which quantity demand equals quantity supply.
Rasaq
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Is a strict example of an imperfect market where there is only one seller and many buyer for a particular product.
Rasaq
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economic is a science with study's the behavior of people,market and price
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Bertilla
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Junior
opp. cost~a benefit, profit or value of something that must be given up to acquire or achieve something else
Kim
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shaikh
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Nazifi
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Abdikarem
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Shafiu
One of the Principle of Economics states "Market is the best place to organize economic activies". However, market may fail if it does not perform it's necessary expected functions like Exercising real forces of demand and supply, contact where transactions are made etc. Though government may int
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Rasaq
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austine
You mean demand and supply of currency ?
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niwagaba
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Abraham
What is the difference between Demand and Quantity Demanded?
Weedh
Demand refers to how much a product is desired by buyer mean while quantity demanded refers to the amount of product a buyer is willing to buy at a certain price.
Junior
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Evening
Junior
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Ogunsola
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Anjorin
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demand is the various quantity of goods or services a consumer is Willing and able to buy at a particular price over s given period of time while quantity demanded is the amount of goods or services being paid for
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Imeobong